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Smart Contracts and Energy: How Blockchain Smart Contracts Can Improve the Energy Sector

Efficient energy management has never been more crucial than it is today, and renewable energy is undoubtedly the future of the industry. Smart contracts and energy transactions go hand in hand to avoid the pitfalls of traditional grid operators: a lack of reliability and consistency. In fact, there has been tremendous early success with autonomous power grids (smart grids) in the construction industry. Smart grid technology will only become possible on a larger scale with the application of blockchain smart contracts.

Smart contracts can help enable transactive energy by addressing many of its inherent challenges, such as cost and security.

 

How Smart Contracts Work

What is a smart contract? “Smart contracts” is a term first coined in the late 1990s by computer scientist Nick Szabo. Simply put, a smart contract is a program stored on a blockchain that only runs transactions when certain predetermined conditions have been met. Think of it like a series of typical “If…then” statements in computer software development, except this code runs on a distributed blockchain, not a traditional server. Blockchain smart contracts have significant potential value in the energy market, such as delivering increased efficiency and transparency to energy transactions.

Leading the Smart Contract Industry

Ethereum is currently the leading platform for blockchain-based smart contracts. The Ethereum network was launched in July of 2015 by founder Vitalik Buterin, a programmer who saw the potential for a blockchain-based smart contract when used with bitcoin-like transactions . Some consider Ethereum smart contracts as the future of cryptocurrency trading, although this is really just one side of blockchain application.

In the energy sector, GumboNet is a leader in the industry that has partnered with several energy companies to provide a secure blockchain network for smart contracts. This network of companies allows GumboNet to integrate transaction data with automated smart contracts, leading to increased transparency and efficiency in peer-to-peer transactions.

 

How Blockchain Smart Contracts Can Improve the Energy Sector

Clean energy technology has become a large and important part of the energy sector. Blockchain smart contracts could be an essential component for its continued growth. In 2001, the US got only half a percent of its electricity from renewable energy sources such as geothermal energy, solar, and wind. In the last twenty years, that number has grown to 10 percent. Future growth may well come from smart grids powered by blockchain smart contracts.

Blockchain Smart Contract Benefits

A blockchain smart contract has several advantages for the energy sector (PDF, 8 MB) over a traditional contract. The biggest opportunity is that smart contract transactions work together with blockchain technology to create the foundation for a more secure, transparent and decentralized system. Blockchain-enabled transactional energy has shown promise, for example, in lowering the cost of renewable energy transactions. If we apply smart contracts to a transactive energy platform, there is a significant opportunity to increase its security, efficiency, and other capabilities. This is accomplished in the following ways:

  • Security: data contained within a blockchain cannot be edited once it has been written.
  • Speed: transactions using blockchain smart contracts are automated, so they can be processed far quicker than a manual system.
  • Accuracy: Smart contracts automatically follow their built-in rules, greatly reducing the potential for error. Blockchain records can also easily be verified by third parties.
  • Decreased cost: Smart contracts streamline transactions and effectively remove the middleman, thereby lowering transaction costs.

Green Energy and Smart Contracts

There are two main emerging technologies in the energy industry that show immense promise for utilizing green energy: peer-to-peer energy trading systems and smart grids. Blockchain smart contracts play an important role. They can certify the source of renewable energy, process transactions at a fast rate, and permanently record every transaction in an auditable record.

Peer-to-Peer Energy Trading

What exactly is P2P energy trading? Peer-to-peer energy trading systems (also known as P2P energy trading) is essentially a transaction that involves the buying and selling of energy between two parties that are connected by a grid. If one party has a surplus of energy, they can sell it directly to another party without needing a middleman. This enables widely distributed, and therefore more resilient, power generation. But increasing the number of buyers and sellers of energy requires a platform to support those transactions. Some P2P energy trading happens with solar energy, but with a blockchain network, a smart grid, and AI—we may very well see the creation of an energy trading system for all types of energy.

Autonomous Smart Grids

A smart grid is an electric grid that permits a two-way communication transaction between the grid and its customers. The current electric grid used by the US was created in the 1890s, and although it has been consistently improved upon over the last hundred years, it’s quickly reaching its capacity. A smart grid is more capable of meeting the current and future electricity needs of energy customers through the use of technologies like smart contracts and smart meters.

Smart grid benefits over a traditional energy grid are as follows:

  • Reliability: Power outages are less common due to the decentralized nature of smart grids – there is no single point of failure – and there is a quicker restoration of power in the event of an outage.
  • Availability: Small-scale, highly-localized energy generation and transmission and makes the energy market more highly available to even remote customers.
  • Efficiency: Smart grids employ smart meters and use renewable energy and energy efficient energy sources.
  • Lower cost: Lower management costs and smaller operations result in a more efficient supply chain and therefore lower prices for energy consumers.

 

Challenges of Smart Contracts in Energy Trading

While smart contract transactions are essential to the future of autonomous energy systems, there are also several obstacles that must be addressed, such as the following:

  • Complexity of smart contract code: Blockchain smart contracts are written in computer code using complex programming structures, and therefore, only developers trained in these programs will understand the smart contract transaction and be able to fix any issues as they arise.
  • Difficult to modify: Once the smart contract code has been deployed, it is very difficult to modify, creating a major obstacle if there are any errors in the smart contract transaction.
  • Security: Blockchain networks are still in the beginning phases of widespread implementation, and as such, smart contract transactions can face many security vulnerabilities.

Energy Trading Security Challenges

One of the biggest challenge for blockchain smart contracts in the energy industry is security. Cyberattacks on energy trading can lead to energy theft, breaches of customer privacy, and electric blackouts. The implications for these risks range from a loss of customers to death, as seen in Texas in February of 2021 where energy blackouts after a natural disaster resulted in the deaths of over one hundred people.

Because of these risks, energy companies are generally reluctant to use new technologies, such as smart contracts. Furthermore, a number of very public incidents have occured where smart contracts have been exploited for unintended purposes.

Overcoming Obstacles in Energy Trading

Smart contracts have a variety of uses in the energy sector, but one of the most promising uses is to promote renewable energy use through smart grids and autonomous, or peer-to-peer, energy trading. The security risks associated with trading in the energy industry can be overcome through a combination of a blockchain solution and smart grids, resulting in a more resilient system that has fewer outages and is harder to hack.

Renewable energy sources such as wind and solar power can be unpredictable as they depend on weather. However, a decentralized power grid that uses blockchains and smart contracts to facilitate transactional energy can help to ensure that energy supplies remain stable regardless of their source.

 

How Smart Contracts Are Enforced

There are currently seventeen states that have legislation related to blockchain technology, but only three (Illinois, Iowa, and New York) currently specify how to enforce smart contracts. These states essentially treat a smart contract as a traditional contract under state law and, as such, are subject to the same rules and restrictions.

Actual judicial enforcement of smart contracts still faces uncertainty, however, because the technology is still relatively new in the world of contract law. Because blockchain smart contracts are immutable and self-enforcing by nature, courts find it very difficult to cancel a smart contract once made.

How Smart Contracts Guarantee Payment

Blockchain technology and distributed ledger technology have major applications for financial institutions. Blockchain solutions essentially cut out the middleman (i.e., financial institutions or banks) for financial services. Through the use of smart contract code, what have typically been manual processes, like processing claims and distributing the contents of a will, are now fully automated processes.

Distributed ledger (PDF, 1 MB) technology is closely related to blockchain. Its benefits include providing more efficient and effective financial institution transfers. Average bank transfers can take up to three days, but using a blockchain ledger allows transactions to be settled directly as soon as payments are made.

Enforcing Smart Contracts: Blockchain Technology Legislature

The Blockchain Technology Act was passed in 2020 in Illinois. It provides definitions for blockchains and smart contracts. It also states that smart contracts cannot be denied legal enforceability simply because they use blockchain technology and that if a law requires a record to be in writing, a blockchain-based smart contract would satisfy this legal requirement. Essentially, it allows smart contracts to be enforced as a legal contract.

New York passed AB 3760 in the Senate in February of 2021. Like the previously mentioned act, this bill essentially allows a smart contract to exist in commerce as a legal contract. It states that any records, contracts, and/or signatures obtained using blockchain technology constitute an electronic record and electronic signature and are therefore legally enforceable as such.

Reliability of Blockchain Smart Contracts

Blockchain smart contracts are only as secure as the programming practice that creates them. As previously mentioned, the computer code used to create blockchain smart contracts is highly complex and prone to being hacked as it is a new technology. However, even with these challenges, blockchain smart contracts are still highly reliable in nature as they are executed immediately and autonomously—reducing the risk of an outside party influence.

Another major roadblock of reliability of blockchain smart contracts lies in the lack of regulations and standards around the technology. As there is more legislature introduced into state and federal law, both the real and perceived reliability of smart contracts will increase.

 

Learn More about Smart Contracts

As seen in this guide to smart contracts, a decentralized energy framework holds immense value and promise for energy consumers, energy providers, and the industry. If you want to learn more about smart contracts and blockchain technology, read this article from IEEE Innovation At Work.

Interested in learning more about smart contracts and energy? Get involved with IEEE Blockchain-Enabled Transactive Energy (BCTE). This program is series of regionally diverse virtual forums addressing Blockchain-enabled transactive energy in the domain of electrical power and energy application development. To learn more about IEEE Blockchain, join the IEEE Blockchain Technical Community to stay informed of latest activities.